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Astec: Part I - Fi

The following excerpt is from the company's SEC filing.

al Inf

ormation

Item 1. Financial Statements

(unaudited)

ensed Con

solida

ted Balance She

ets as of September 30, 2015 and December 31, 2014

Condensed Consolidated Statemen

ts of Income for the Three and Nine Months Ended September 30,

2015

and 2014

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015

Condensed Consolidated Statement of Equity for t he Nine Months Ended September 30, 201

es to

naudited

Condensed Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financia

l Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II - Other I

nformation

Item 1. Legal Proceedings

Item 1A. Risk

Factors

m 6. Exhibits

PART I -- FINANCIAL INFORMATION

Astec Industries, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

ASSETS

Current assets:

Cash and cash equivalents

13,985

13,023

Investments

Trade receivables

103,629

105,743

Other receivables

Inventories

384,531

387,835

Prepaid expenses and other

34,161

28,299

Deferred income tax assets

16,237

14,817

Total current assets

555,974

553,191

Property and equipment, net

170,508

187,610

11,814

11,393

Goodwill

31,280

31,995

Other long-term assets

17,711

21,276

Total assets

787,287

805,465

LIABILITIES AND EQUITY

Current liabilities:

Short-term debt and current maturities of long-term debt

Accounts payable

46,406

60,987

Income taxes payable

Accrued product warranty

10,064

10,032

Customer deposits

32,563

45,086

Accrued payroll and related liabilities

19,893

17,265

Accrued loss reserves

Other current liabilities

20,311

18,450

Total current liabilities

137,974

161,129

Long-term debt

Deferred income tax liabilities

13,194

16,836

Other long-term liabilities

19,331

21,087

Total liabilities

174,893

206,113

Shareholders' equity

610,392

595,166

Non-controlling interest

Total equity

612,394

599,352

Total liabilities and equity

See Notes to Unaudited Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Income

(in thousands, except per share data)

Three Months Ended

Net sales

211,350

220,157

768,141

736,086

Cost of sales

166,212

176,896

594,724

573,890

Gross profit

45,138

43,261

173,417

162,196

Selling, general, administrative and engineering expenses

41,023

38,867

128,136

122,539

Income from operations

45,281

39,657

Interest expense

Other income, net of expenses

Income from operations before income taxes

46,602

41,536

18,070

15,734

Net income

28,532

25,802

Net loss attributable to non-controlling interest

Net income attributable to controlling interest

29,201

25,958

Earnings per common share

Net income attributable to controlling interest:

Diluted

Weighted average number of common shares outstanding:

22,943

22,830

22,930

22,813

23,121

23,109

23,118

23,103

Dividends declared per common share

Condensed Consolidated Statements of Comprehensive Income (Loss)

Other comprehensive income:

Change in unrecognized pension and post-retirement

benefit costs

Income tax (provision) benefit on change in unrecognized

pension and post-retirement benefit costs

Foreign currency translation adjustments

(7,003

(5,602

(10,721

(3,475

Income tax benefit on foreign currency translation

Other comprehensive loss

(6,165

(5,105

(9,906

(2,931

Comprehensive income (loss)

(4,207

(3,339

18,626

22,871

Comprehensive loss attributable to non-

(1,285

Comprehensive income (loss) attributable

(3,600

(2,867

19,911

23,152

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

18,042

18,149

Provision (benefit) for doubtful accounts

Provision for warranties

11,723

12,436

Deferred compensation provision

Stock-based compensation

Tax benefit from stock incentive plans

Deferred income tax benefit

(3,959

(4,124

Gain on disposition of fixed assets

Distributions to SERP participants

(2,649

Change in operating assets and liabilities:

(Purchase) sale of trading securities, net

Trade and other receivables

(8,432

(19,456

Other assets

(3,294

(14,581

(11,499

(12,051

(12,523

(1,178

Prepaid and income taxes payable, net

(1,792

Net cash provided by operating activities

22,144

12,845

Cash flows from investing activities:

Expenditures for property and equipment

(15,483

(18,445

Business acquisition, net of cash acquired

(34,965

Sale of investments

16,249

Proceeds from life insurance cash surrender value

Proceeds from sale of property and equipment

Net cash used by investing activities

(14,398

(36,610

Cash flows from financing activities:

Payment of dividends

(6,893

(6,874

Borrowings under bank loans

Repayments of bank loans

(3,507

Tax benefit from stock issued under incentive plans

Sale (purchase) of Company shares held by SERP, net

Withholding tax paid upon vesting of restricted stock units

Proceeds from exercise of stock options

Sale (purchase) of subsidiaries shares to/from minority shareholders, net

Net cash provided (used) by financing activities

(5,519

Effect of exchange rates on cash

(1,265

Net increase (decrease) in cash and cash equivalents

(21,744

Cash and cash equivalents, beginning of period

35,564

Cash and cash equivalents, end of period

13,820

For the Nine Months Ended September 30, 2015

Common

Shares

Amount

Additional

Paid-in-

Capital

Accum-

ulated

Compre-

by SERP

Retained

Earnings

Interest

Balance, December

135,887

(12,915

(2,929

470,537

(10,522

(6,899

Change in ownership

of subsidiary

Stock issued under

of RSUs

SERP transactions,

Balance, September

22,987

137,583

(22,821

(1,806

492,839

ASTEC INDUSTRIES, INC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in thousands, except per share amounts, unless otherwise specified)

Note 1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Astec Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 2014.

The unaudited condensed consolidated balance sheet as of December 31, 2014 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Dollar and share amounts shown are in thousands, except per share amounts, unless otherwise specified.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the previous threshold for disposals to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The standard also allows companies to have significant continuing involvement and continuing cash flows with the discontinued operation. The standard requires the reclassification of assets and liabilities of a discontinued operation in the balance sheet for all periods presented. The standard is effective for public entities for annual periods beginning on or after December 15, 2014 and is to be implemented prospectively. The Company's adoption of this standard effective January 1, 2015 did not have a significant impact on the Company's financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which supersedes existing revenue guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The implementation of this new standard will require companies to use more judgment and to make more estimates than under current guidance. The standard is effective for public companies for annual periods beginning after December 15, 2017. The Company plans to adopt the new standard effective January 1, 2018. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position or results of operations.

In July 2015, the FASB issued ASU No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which changes the measurement basis for inventory from the lower of cost or market to lower of cost and net realizable value and also eliminates the requirement for companies to consider replacement cost or net realizable value less an approximate normal profit margin when determining the recorded value of inventory. The standard is effective for public companies in fiscal years beginning after December 15, 2016, and the Company expects to adopt the standard effective January 1, 2017. The Company has not yet determined what impact, if any, the adoption of this new standard will have on the Company's financial position or results of operations.

Note 2. Earnings per Share

Basic earnings per share are determined by dividing earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per share include the potential dilutive effect of options, restricted stock units and shares held in the Company's Supplemental Executive Retirement Plan.

The following table sets forth the computation of net income attributable to controlling interest and the number of basic and diluted shares used in the computation of earnings per share:

Numerator:

Denominator:

Denominator for basic earnings per share

Effect of dilutive securities:

Employee stock options and restricted stock units

Denominator for diluted earnings per share

Antidilutive options are not included in the diluted earnings per share computation. The number of antidilutive options in the three and nine-month periods ended September 30, 2015 and 2014 were not material.

Note 3. Receivables

Receivables are net of allowances for doubtful accounts of $1,788 and $2,248 as of September 30, 2015 and December 31, 2014, respectively.

Note 4. Inventories

Inventories consist of the following:

Raw materials and parts

145,429

149,171

Work-in-process

95,946

105,163

Finished goods

113,771

102,235

Used equipment

29,385

31,266

Raw material inventory is comprised of purchased steel and other purchased items for use in the manufacturing process or held for sale in the Company's after-market parts business. The category also includes the manufacturing cost of completed equipment sub-assemblies produced for either integration into equipment manufactured at a later date or for sale in the Company's after-market parts business.

Work-in-process inventory consists of the value of materials, labor and overhead incurred to date in the manufacturing of incomplete equipment or incomplete equipment sub-assemblies being produced.

Finished goods inventory consists of completed equipment manufactured for sale to customers.

Used inventory consists of equipment accepted in trade or purchased on the open market. The category also includes equipment rented to prospective customers on a short-term or month-to-month basis. Used equipment is valued at the lower of acquired or trade-in cost or market determined on each separate unit. Each unit of rental equipment is valued at its original manufacturing cost and is reduced by an appropriate reserve each month during the period of time the equipment is rented.

Inventories are valued at the lower of cost (first-in, first-out) or market, which requires the Company to make specific estimates, assumptions and judgments in determining the amount, if any, of reductions in the valuation of inventories to their net realizable values. The net realizable values of the Company's products are impacted by a number of factors, including changes in the price of steel, competitive sales pricing, quantities of inventories on hand, the age of the individual inventory items, market acceptance of the Company's products, the Company's normal gross margins, actions by the Company's competitors, the condition of the Company's used and rental inventory and general economic factors. Once an inventory item's value has been deemed to be less than cost, a net realizable value allowance is calculated and a new "cost basis" for that item is effectively established. This new cost is retained for that item until such time as the item is disposed of or the Company determines that an additional write-down is necessary. Additional write-downs may be required in the future based upon changes in assumptions due to general economic downturns in the markets in which the Company operates, changes in competitor pricing, new product design or other technological advances introduced by the Company or its competitors and other factors unique to individual inventory items.

The most significant component of the Company's inventory is steel. A significant decline in the market price of steel could result in a decline in the market value of the equipment or parts the Company sells. During periods of significant declining steel prices, the Company reviews the valuation of its inventories to determine if reductions are needed in the recorded value of inventory on hand to its net realizable value.

The Company reviews the individual items included in its finished goods, used equipment and rental equipment inventory on a model-by-model or unit-by-unit basis to determine if any item's net realizable value is below its carrying value each quarter. This analysis is expanded to include items in work-in-process and raw material inventory if factors indicate those items may also be impacted. In performing this review, judgments are made and, in addition to the factors discussed above, additional consideration is given to the age of the specific items of used or rental inventory, prior sales offers or lack thereof, the physical condition of the specific items and general market conditions for the specific items. Additionally, an analysis of raw material inventory is performed each quarter to calculate any valuation write-downs needed for obsolete inventory based upon quantities of items on hand, the age of those items and their recent and expected future usage or sale.

When the Company determines that the value of inventory has become impaired through damage, deterioration, obsolescence, changes in price levels, excessive levels of inventory or other causes, the Company reduces the carrying value to estimated market value based on estimates, assumptions and judgments made from the information available at that time.

Abnormal amounts of idle facility expense, freight, handling cost and wasted materials are recognized as current period charges.

Note 5. Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation of $213,648 and $222,001 as of September 30, 2015 and December 31, 2014, respectively.

During the second quarter of 2015, the Company closed its Astec Underground facility in Loudon Tennessee and relocated (or disposed of) the majority of its non-real estate fixed assets to other Company facilities. The book value of the Loudon facility ($9,248) is classified as held for sale at September 30, 2015 and is included in other current assets in the accompanying condensed consolidated balance sheet as of September 30, 2015. The Company closed on the sale of the facility in October 2015 and collected the $9,599 net sales price. The costs of closing the facility totaling $1,500 were recorded in cost of sales ($999) and selling, general and administrative expenses ($501) in the accompanying condensed consolidated statement of income in the first six months of 2015.

Note 6. Fair Value Measurements

The Company has various financial instruments that must be measured at fair value on a recurring basis, including marketable debt and equity securities held by Astec Insurance Company ("Astec Insurance"), the Company's captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan ("SERP"). The obligations of the Company associated with the financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes and are included in other long-term liabilities in the accompanying balance sheets. The Company's subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.

The carrying amount of cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable approximates their fair value because of the short-term nature of these instruments. Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset. The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.

Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The inputs used to measure the fair value are identified in the following hierarchy:

Level 1 -

Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 -

Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted

quoted prices for identical or similar assets or liabilities in markets that are not active; or

inputs other than quoted prices that are observable for the asset or liability.

Level 3 -

Inputs reflect management's best estimate of what market participants would use in pricing

the asset or liability at the measurement date. Consideration is given to the risk inherent in

the valuation technique and the risk inherent in the inputs to the model.

As indicated in the tables below (which excludes the Company's pension assets), the Company has determined that all of its financial assets and liabilities as of September 30, 2015 and December 31, 2014 are level 1 and level 2 in the fair value hierarchy as defined above:

Financial Assets:

Trading equity securities:

SERP money market fund

SERP mutual funds

Preferred stocks

Trading debt securities:

Corporate bonds

Municipal bonds

Floating rate notes

Asset backed securities

Derivative financial instruments

Total financial assets

15,716

Financial Liabilities:

SERP liabilities

Total financial liabilities

U.S. Treasury bills

13,856

The Company reevaluates the volume of trading activity for each of its investments at the end of each quarter and adjusts the level within the fair value hierarchy as needed. Six corporate bond investments with a combined September 30, 2015 market value of $1,141 changed from Level 1 in the hierarchy at December 31, 2014 to Level 2 at September 30, 2015 due to a reduction in trading activity.

The trading equity investments noted above are valued at their fair value based on their quoted market prices, and the debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained with the assistance of a nationally recognized third party pricing service. Additionally, a significant portion of the SERP's investments in trading equity securities are in money market and mutual funds. As these money market and mutual funds are held in a SERP, they are also included in the Company's liability under its SERP.

Trading debt securities are comprised of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities.

Net unrealized gains or losses incurred on investments held as of September 30, 2015 and December 31, 2014 amounted to net losses of $144 and $17, respectively.

Note 7.

On April 12, 2012, the Company and certain of its subsidiaries entered into an amended and restated credit agreement whereby Wells Fargo extended to the Company an unsecured line of credit of up to $100,000, including a sub-limit for letters of credit of up to $25,000. During the three and nine-month periods ended September 30, 2015, the highest amount of outstanding borrowings at any time under the facility was $5,542 and $7,871, respectively. The $1,251 outstanding borrowings under the facility, which are included in short-term debt and current maturities of long-term debt in the accompanying condensed balance sheet at September 30, 2015, were paid off in early October 2015. As of December 31, 2014, there were no outstanding borrowings under the line of credit facility. Letters of credit totaling $14,461, including $8,674 of letters of credit issued to banks in Brazil to secure the local debt of Astec do Brasil Fabricacao de Equipamentos Ltda. ("Astec Brazil"), were outstanding under the credit facility as of September 30, 2015, resulting in additional borrowing ability of $84,288 under the credit facility. The credit agreement has a five-year term expiring in April 2017. Borrowings under the agreement are subject to an interest rate equal to the daily one-month LIBOR rate plus a 0.75% margin, resulting in a rate of 0.95% as of September 30, 2015. The unused facility fee is 0.175%. Interest only payments are due monthly. The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures. The Company was in compliance with these covenants as of September 30, 2015.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd ("Osborn"), has a credit facility of $6,874 with a South African bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of September 30, 2015, Osborn had no borrowings outstanding under the facility but did have $1,118 in performance, advance payment and retention guarantees outstanding under the facility. The facility has been guaranteed by Astec Industries, Inc., but is otherwise unsecured. A 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of September 30, 2015, Osborn had available credit under the facility of $5,756. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 9.25% as of September 30, 2015.

The Company's Brazilian subsidiary, Astec Brazil, has outstanding working capital loans totaling $6,512 from three Brazilian banks with interest rates ranging from 10.3% to 20.3%. The loans' maturity dates range from December 2016 to April 2024 and the debts are secured by Astec Brazil's manufacturing facility and also by letters of credit totaling $8,674 issued by Astec Industries, Inc. Additionally, Astec Brazil has various 5-year equipment financing loans outstanding with two Brazilian banks in the aggregate of $1,450 as of September 30, 2015 that have interest rates ranging from 3.5% to 16.3%. These equipment loans have maturity dates ranging from September 2018 to April 2020. Astec Brazil's loans are included in the accompanying balance sheets as short-term debt and current maturities of long-term debt ($3,568) and long-term debt ($4,394).

Note 8. Product Warranty Reserves

The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products, but generally range from three months to one year or up to a specified number of hours of operation. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The product warranty liability is primarily based on historical claim rates, nature of claims and the associated cost.

Changes in the Company's product warranty liability for the three and nine-month periods ended September 30, 2015 and 2014 are as follows:

Reserve balance, beginning of the period

10,761

14,102

12,716

Warranty liabilities accrued

Warranty liabilities settled

(3,828

(4,804

Reserve balance, end of the period

13,404

Note 9. Accrued Loss Reserves

The Company records reserves for losses related to known workers' compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company. The undiscounted reserves are actuarially determined based on the Company's evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future. Total accrued loss reserves were $8,382 as of September 30, 2015 and $7,562 as of December 31, 2014, of which $5,345 and $4,512 were included in other long-term liabilities as of September 30, 2015 and December 31, 2014, respectively.

Note 10. Income Taxes

The Company's effective income tax rate was 52.5% and 64.0% for the three-month periods ended September 30, 2015 and 2014, respectively. The Company's effective income tax rate was 38.8% and 37.9% for the nine-month periods ended September 30, 2015 and 2014, respectively. The Company's effective tax rate for the nine months ended September 30, 2015 includes the effect of state income taxes and other discrete items but did not include benefits for the research and development credit given that legislation extending the research and development credit to 2015 has not been enacted by Congress. The Company's effective tax rate for the nine months ended September 30, 2014 also did not include a benefit for the research and development tax credit given that Congress had not enacted legislation extending the credit to 2014 as of September 30, 2014.

The Company's recorded liability for uncertain tax positions as of September 30, 2015 has decreased by approximately $711 as compared to December 31, 2014 as the result of a tax audit settlement related to tax year 2010.

Note 11. Segment Information

The Company has three reportable segments, each of which is comprised of multiple business units that offer similar products and services and meet the requirements for aggregation. A brief description of each segment is as follows:

Infrastructure Group

- This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants, wood pellet plants, asphalt pavers, material transfer vehicles, milling machines and paver screeds. The other two business units in this segment primarily operate as Company-owned dealers in the foreign countries in which they are domiciled. These two business units sell, service and install products produced by the manufacturing subsidiaries of the Company, and a majority of their sales are to customers in the infrastructure industry. The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors, wood pellet processors and foreign and domestic governmental agencies.

Aggregate and Mining Group

- This segment consists of eight business units that design, engineer, manufacture and market a complete line of jaw crushers, cone crushers, horizontal shaft impactors, vertical shaft impactors, material handling, roll rock crushers and stationary rockbreaker systems, vibrating feeders and high frequency vibrating...


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